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We’re once again suffering a bout of stock market indigestion–hardly surprising after a robust two-year market rally. We’ve enjoyed healthy returns since October 2022. Now it’s time for a taste of risk. Indeed, today, the Nikkei Stock Average fell 12.4%, its worst one-day performance since 1987.
No doubt market pundits will start focusing intently on what the Federal Reserve will do in September, and whether indications of economic weakness will result in a larger-than-anticipated interest rate cut. The good news: With short-term rates so high, the Fed has plenty of fire power.
My question for my fellow HumbleDollar denizens: What do you say to yourself at times like this to keep yourself invested in the stock market? Perhaps your mantra or mantras might help your fellow readers.
I’m late to this post but after Friday 8/9 we’re basically back to where markets were before Mondays rout!
My retirement portfolio is invested/ managed in various strategies and instruments through my Financial Advisor that I can’t easily change. I am comfortable with this arrangement and my asset allocation and really don’t worry about short term blips in equity markets. Knowing there is nothing I can/ need to do removes the emotional response some might have in volatile markets.
Easy, keep investing. There is a story on a young boy asking the great financiier JP Morgan what the market was going to do. His reply:”fluctuate, my dear boy.’
I keep this list of “on average” expected market declines posted above my computer:
-5% 3 times per year
-10% every year
-15% every 4 years
-20% every 6 years
-30% every 18 years
And when making decisions always ask myself: “Am I invested in such a manner that I will be financially and emotionally OK during these events?”
Warren Buffet keeps billions of dollars in cash when he can’t find worthy investments selling at reasonable prices. He doesn’t seek to be fully invested at all times.
But when the market drops and share prices decline, he’s “like a kid in a candy store” scooping up the shares of good companies selling at bargain prices.
My mantra: If it’s good enough for Warren, it’s good enough for me.
A fun mantra I suppose, but in reality what Warren does with Berkshire Hathaway’s money is of little relevance to me (except as a shareholder). Warren and his team’s resources and skill in doing what you describe is far superior to mine, and Berkshire’s investing horizon is far longer than mine, or that of anyone here.
I think the lesson we can take from observing Warren Buffet is that it’s okay to set some cash aside when asset prices are high, and wait for a time to invest when assets are priced at more reasonable levels. You don’t need to be fully invested at all times to earn a healthy long-term return.
Isn’t this the same behavior as rebalancing when markets have risen significantly, moving funds from stocks to bonds (or cash); then moving funds from bonds/cash to stocks when stock prices are lower?
Of course that’s okay if that how one wants to invest. There are pros and cons to this, as the comments right below ours allude to.
Re your question, no, I don’t think it is the same.
Rebalancing implies the investor has decided on a target asset allocation, and when that allocation is out of whack by whatever measure the investor chooses, they sell and buy as needed to return to their target allocation. In this case, the cash allocation is what it is because the investor has decided that’s what they want, not holding dry powder because they “can’t find worthy investments.”
One works for me and one works for Berkshire, as well as of course for some individual investors. But to my point, Berkshire and I are such different investors that I don’t see their practices as something to do myself. I’d rather set an allocation and rebalance as needed.
I see stock market declines as an opportunity to buy. I keep cash available for such occasions and if it declines more, I buy more.
While this approach is embraced by many investors, I’ve yet to see convincing evidence of its effectiveness. The argument against this approach is that cash set aside until a selloff is money that is missing out on market gains until there is a downturn.
You’re right from a pure return point of view — you should indeed skip the cash and stay fully invested in stocks. But I could also see that the chance to do some buying during a downturn might help from a behavioral standpoint, allowing investors to do something sensible during a stock market decline that will perhaps take some of the sting out of their short-term losses.
Stocks go up, stocks go down, stocks spin around. This is why I keep a cash cushion.
I need some of my dividends to pay living expenses. Sure, I could go 100% cash, but I’d have huge capital gains and the 5% you can get on cash might soon disappear.
I assume your investments are not qualified plans then?
I looked around and decided that I did not have any of the usual plays available…did not have any tax losses to harvest (all of the taxable investments had substantial taxable gains even after the event.) I had done most of my planned Roth conversion with the last being a week ago (can’t really do more until December and review my earnings). My IRA’s are 90% stock so not much to do there. I made that move in March 2020 during the last crash.
This has happened before. It will happen again. Every time the recovery period is different, but so far recovery has always followed events such as these. I see no reason to make substantial changes.
At 79, I’ve been through a few of these. Black Monday, scared me as a 42 year old, but fortunately I was too paralyzed to act. The .com bubble burst, then the Global Financail Crisis hit when I was about to retire. By the time Covid hit, I was determined to BUY rather than sit on my hands. Got in a little too early, but still close to the bottom.
No one knows what’s next, but so far riding it out has worked for me.
Mantra: “Don’t turn a temporary set back into a permanent loss”
This thread brings to mind one of my favorite Wall Street sayings: “Bear markets are when stocks revert to their rightful owners.”
We should all aspire to be rightful owners of stocks.
Your last sentence finally brings out to me the significance of this saying, and now it’s a favorite of mine as well.
Regarding all of the comments on this post, the advisors I know are spending recent days talking panicking clients off of the ledge. They would love it if all their peeps were HD readers.
At 53 and still working my plan is to do nothing. I may look.for.an opportunity to buy additional equities at this time but it depends. My long term goal is to remain invested knowing this will likely correct itself. Only someone jumping of a moving train has the chance of being hurt. We have 5 years of living expenses set aside, no mortgage or additional debt.
I just avoid looking at the balances and go about my day.
“this will likely correct itself”, it always does, and in the unlikely case that it doesn’t we as a country have a much bigger problem to address.
Sound philosophy and sound plan
I was about to rebalance, my stock percentage having increased from 50% to 54% while I wasn’t paying attention. I guess now I don’t need to bother. Score one for benign neglect.
I’m considering converting part of my traditional IRA to a ROTH IRA.
Did my transfer today. I was wondering if I would have a chance to do a transfer at reduced rates this year and it happened!
For me it’s just a news story of the day. No more, no less. Nothing to act on.
Do nothing….blip on the screen for the long term. Try to have a portfolio where you can simply do nothing right now…..except, of course, follow baseball scores !! Take a peek at things over an eggnog during holidays….rebalance then.
If it helps, the SP500 is still up 9.35% YTD, and 14.78% YOY.
I look at my IRA portfolio’s return and it’s still up 5% YTD. what more can i ask ?
Thanks for that fact. It helps! Keep the long term perspective. Last week’s performance barely nudged the 5 year moving average.
This too, shall pass.
I agree.
No mantra here, just plugging numbers into my rebalancing spreadsheet to determine where to invest my wife’s latest paycheck worth of 401(k) contributions. (Not paying much attention to the total assets.) Our allocation to US stocks is down most for us, so I will be putting the money into FZIPX (Fidelity Zero Extended Market Index Fund).
There are two actions which I think are reasonable to take:
1) Follow Warren Buffet’s mantra and be greedy when others are fearful (one of my possible interventions is if the Morningstar US Index gets into correction territory increase my equity stake 5%- then get back to my target percentages when the market reaches a new high); or
2) Follow John Bogle’s mantras: ignore the noise, or don’t just do something, stand there (in which case doing something is actually doing nothing) 🤔
PS: Sounds like a good title for a Seinfeld episode
Short answer: “Don’t panic”
Medium answer: 2 years of imbibing the wisdom at HumbleDollar has given me the tools to construct a plan, to understand the options and to have some hope staying rational in my response.
Longer answer: Probably just execute plan in place …. “bridge” to SS, stick to re-balancing targets (% based), take advantage of lower prices for loss/reduced cap gains if it gets there.
As with all plans, it’s a work in progress but without the last 2 years input here, I’d almost certainly reading financial doom-and-gloom press and, well, panicking. Thanks Johnathan et al.
As I am sure that Johnathan and most Humble Dollar readers know, having a robust investment plan and sticking with it over time is your best bet. I always laugh at the extent of media hype with selloffs like Friday and today. (I know it makes for good TV.) I know it hurts anytime to see red on our investment screens, but let’s keep things in perspective. Based on current SPY price of $515 as I write today, see below the SPY returns from some historical points just for reference. (SPY = sp500 index etf)
-9.0% since Jul2024 all time high
+135% since Mar2020 (“covid”), $218 low
+670% since Mar2009 (“great financial crisis”), $67 low
+570% since Oct2002 (“dot com bubble”), $77 low
(and these returns don’t even include dividends received)
Of course no one, and I mean NO ONE, knows for sure what happens from here. Hopefully each of our plans are robust enough to handle a large range of future market outcomes.
Being old enough (72) to have experienced a few of these before helps, and a healthy cash cushion helps even more.
I just avoid looking at my retirement account balance when the stock market is tanking. At times like these, I’m happy that slightly over half of my nest egg is sitting in guaranteed return accounts (earning between 4 and 7.5%). But, at times when the stock market is soaring, I often wish I had more money invested in stocks. The grass is always greener…
I’m still working and buying stocks. By the way Jonathan, I’ve always loved and appreciated your timely calming words.
Mantra: “What would Jonathan Clements do?”
I kissed rebalancing goodbye. Not planning on doing anything, including looking at my 401(k) balance for a good while.
I sent a text to our son to not panic, stay the course. He is buying on sale when it goes down. The same for us. We are still buying in spouse’s 401k since they are still working part time. We have a cash cushion also like some of the others have mentioned. Chris
Jonathan, I’ve decided to ride it out, an atypical response for me. For once, I’m glad I’ve learned from Humble Dollar that time is on my side–after all, the market is in bull mode two-thirds of the time and bear markets usually don’t last as long as bull markets do. I’m fortunate to have cash and sources of stable income to see me through and, finally, glad that I’m very light in tech.
I feel for those who have planned to count on withdrawing on a percentage basis or caught in a sequence of return trap.They may need to do some rejiggering, maybe with bonds for stability and a little capital gain from the lower interest rates sure to come.
I was just about to post on this same topic.
My emotional side says run for cover the sky is falling. I sure don’t like to see red figures on the screen. Even though I am not using the funds, I feel like I should watch spending.
My logical side says ignore it all. Fortunately my IRA has sufficient cash to make this year’s RMD.
What I would like to hear is how the folks who are making withdrawals for living expenses are doing both emotionally and practically.
What? Me worry? 🙂
Emotionally, all good. A cash cushion contributes to this.
Practically, will be attentive to opportunities to make a little lemonade out of the lemons by harvesting capital losses in taxable accounts and reinvesting proceeds. Otherwise changing nothing.
We made a withdrawal at the beginning of the year. Don’t plan to make another until January. We can be flexible how much since we will start SS then. Chris
I wrote about lessons learned in my Hurt So Good post; the market goes back up. I don’t sweat the volatility. I’ve been making monthly deposits into a growth fund that I like and will continue to do so if/when the market continues to tank.
I’ll be looking for the opportunity to realize capital losses in taxable accounts, with the intent of immediately reinvesting proceeds.
Very timely Jonathan. During my working years I would look at this as a buying opportunity. It’s harder to think that way at this stage. Reinvesting dividends makes me feel like I’m still participating. Having a cash bucket also makes it easier.
I agree. I don’t have a mantra, and it may be that having a sizable cash bucket means I don’t feel I need one.